UK inflation falls to 6.7% in August 2023

UK inflation continues to fall with the latest figures showing a rate of 6.7% in August 2023, down from 6.8% the month before.

Here, we explain everything you need to know about the latest inflation stats and which savings accounts offer inflation-beating rates. 

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What is the current rate of inflation in the UK?

The current rate of inflation in the UK is 6.7% for August 2023 according to the latest figures from the Office for National Statistics (ONS).

That’s down from 6.8% in July and a considerable slide from its most recent peak of 11.1% in October 2022. Compared to August 2022 though, inflation has risen 0.5%.

Slowing food prices were the main contributing factor to inflation dipping this month.

Prices for food and non-alcoholic beverages fell to 13.6% in August – down from 14.9% in July. And considerably less than the 45-year high of 19.2% we saw in March 2023.

The current rate of core inflation (more on this later) in the UK is 6.2% – down from 6.9% in July.

Historic inflation rates

The graph below shows how inflation has changed in the UK.

source: tradingeconomics.com

Why is inflation so high?

Despite inflation falling, it still remains well above the target rate of 2%. There are several factors behind the high levels of inflation we’ve seen over the last year. 

Firstly, oil and gas prices have soared due to greater demand post-pandemic and the ongoing conflict in Ukraine, impacting our energy and petrol costs. 

The war and bad harvests elsewhere have also affected global food supply chains, creating a shortage in things like grains and fresh produce, while Brexit has caused issues at ports making it more expensive for food and other European imports. Combined these things have contributed to the highest food prices in 45-years, back in March 2023.

And there are other things, such as rising wages and possibly profiteering that have helped to push prices up further. And the after-effects of the pandemic are still being felt too.

When is the next inflation announcement?

The next inflation announcement will be on 18 October 2023. 

Typically the ONS publishes inflation figures each month and has confirmed the following dates for upcoming announcements : 

• 15 November 2023
• 20 December 2023
• 17 January 2024

What is inflation?

Inflation is a measurement that helps us track the price increase of goods and services over time. 

It compares the cost of things today with how much they cost a year ago. And the average increase in prices is what we call the inflation rate. 

Let’s take a loaf of bread as an example. If it costs £1 to buy a load today and next year it costs £1.10, the annual inflation for that loaf of bread is 10%. 

What is deflation?

Deflation works the opposite way and tracks the rate that prices decrease for goods and services over time. 

So looking at that loaf of bread again. If it costs £1 to buy a loaf today but that falls to 90p next year, then the deflation rate would be -10%.

How is UK inflation measured?

The Office for National Statistics (ONS) is in charge of measuring inflation in the UK and publishes figures each month to show how prices have changed. 

There are three common measures of inflation; Consumer Prices Index (CPI), Consumer Prices Index with Housing (CPIH) and the Retail Price Index (RPI). 

This can get a little confusing at first with all of the different figures, but the breakdown below shows how each one works and how relevant it is to you. 

CPI inflation

The Consumer Price Index (CPI) is the UK’s official measure of inflation and the rate you’re likely to see make headlines. 

For CPI, the ONS tracks around 180,000 prices of 700 hundred everyday items in an imaginary shopping basket (called the basket of goods) to work out the inflation rate. 

These everyday items and services fall into one of the following categories: 

• Food & non-alcoholic beverages
• Alcohol & tobacco
• Clothing & footwear
• Housing & household services
• Furniture & household goods
• Health
• Transport
• Communication
• Recreation & culture
• Education
• Restaurants & hotels
• Miscellaneous goods & services

The basket of goods gets reviewed each year to make sure that it gives an accurate picture of how price rises relate to our spending habits and patterns.

This means that products and services might get added to the basket each month, while others are taken out.  

CPIH Inflation

CPIH is a measure of UK inflation that takes into account housing costs, as well as everyday goods and services. And, the current rate of CPIH inflation is 6.3%.

It uses the same basket of goods as CPI but also includes prices for things like the cost of owning, renting or maintaining your home. It also takes into account expenses like council tax.  

CPIH is the newest measure of inflation and was introduced in 2013 to plug some of the gaps left by CPI (mainly the lack of tracking of housing costs.) 

RPI inflation

RPI used to be the main measure of inflation in the UK until it was replaced by CPI in 2011. Currently, RPI in the UK is 9.1%.

It tracks the same basket of goods currently used for CPI but also includes things like estate agent fees, buildings insurance, TV licence and mortgage interest payments (which aren’t included anymore!) And, it tends to be higher than the CPI and CPIH measure of inflation. 

Although RPI isn’t the main inflation figure anymore, it’s still used to set the price of things like interest on student loan repayments and rail fare increase we get each year. However, this year’s rail fare increase was capped at 5.9% (rather than the full RPI figure of 13.3%) in an attempt to help ease the rising cost of living

RPI also plays a big role in the level of retirement income people get from final salary pensions and annuities. 

Do we really need RPI?

So you might be wondering why we still use RPI if it’s technically been replaced. Well, there’s an ongoing debate about its purpose and relevance. 

On one hand, final salary pension schemes and annuities may see less of an income boost if RPI was scrapped altogether. 

However, the government’s use of RPI compared to CPI, in particular, has also come under fire. 

Usually, the government links its own spending – which includes things like the state pension, statutory sick pay and benefits – to the CPI rate of inflation, which is lower. 

However, it uses RPI (which is higher) when it comes to the costs we pay such as train tickets, car tax and student loan interest to name a few. 

At this stage, it remains to be seen what will happen with RPI and whether it is replaced completely by one of the other inflation measures. 

What is core inflation?

Another measurement for inflation you may have come across is “core inflation.” Core inflation tracks the same goods and services as CPI but doesn’t include food, energy, alcohol and tobacco. 

These are taken out as they’re generally seen as the most volatile, so core inflation should give us a better understanding of how prices are changing outside of the everyday essentials.

In August 2023 core inflation was 6.2%, down from 6.9% the month prior so price rises seem to be slowing for goods and services across the board.

Will inflation go up or down?

Inflation tends to fluctuate depending on the health of the economy. The Bank of England’s (BOE) target is to keep inflation at 2% but the latest figures show that inflation is 6.7%, so there’s still a way to go.

The BoE’s strategy for controlling inflation is to raise interest rates. And there have been 14 consecutive interest rate rises since December 2021 to help bring it down.

The downward trend of inflation we see now falls in line with current market predictions. The Office for Budget Responsibility (OBR) forecasts what could happen with inflation over time.

According to the latest predictions, we could see inflation continue to fall throughout the remainder of 2023. And it could reach the BOE’s target by the end of 2024.

How does inflation affect me?

Inflation shows how much the cost of living is rising and gives you an idea of your spending power. So, the higher the rate of inflation, the more expensive everyday expenses tend to be. 

With the current cost of living crisis, we’ve all seen how sharply prices have risen over recent years. From eye-watering grocery bills to the cost of heating and powering our homes, prices have risen across the board. 

High inflation has also caused 14 consecutive increases to the interest base rate by the BoE. That’s because the BoE raises interest rates in an attempt to bring down inflation to its 2% target. And changes to interest rates can impact both borrowing (especially mortgage) and savings.

Inflation also increases the risk of your money losing value in real terms. One area is wages. If they don’t increase in line with inflation you’ll need to use a higher proportion of your income to buy the same goods and services.

Similarly, your savings could lose value as well because, if your money is earning less interest than the rate of inflation – you won’t be able to buy as much with it.

Do any savings accounts beat inflation?

Although inflation is quite high at the moment so there are some current accounts that beat it.

The top-paying savings account is the Skipton Building Society Member Regular Saver which pays 7.5% AER. You’ll need to be an existing member of Skipton to get this account. 

Similarly, the First Direct Regular Saver pays 7% and you’ll need to have a bank account with them to access this rate. 

It’s worth noting that both of these accounts are what’s known as ‘regular savings accounts.’ This means that you’ll have to meet certain requirements to keep the account open and get the full amount of interest. 

For example, depositing up to a certain amount each month or limits on how much you can withdraw. (Some don’t permit withdrawals at all.) 

You can also earn an inflation-beating 7% with the Santander Edge Saver, if you hold a Santander Edge account. But you’ll have to pay a monthly fee for the current account, so keep that in mind when comparing savings rates.

Easy access savings accounts allow more flexibility and you can deposit and withdraw your money more freely. However, you often have to forgo the amount of interest you can earn for that benefit. And currently, the top-paying easy access account offers 5% interest.